In Economics, what is a Price System?

A price system in economics serves the function of regulating the production and consumption of goods by determining their monetary or trade value. There are three different types of these systems in economics: free, mixed and fixed. Each of these is characterized by the amount of control that forces outside of the market have on prices and especially the factors of production, which include land, labor and capital.

All modern societies use price systems. They motivate both consumers and producers to make decisions. For example, in most cases, a consumer will choose the product that is the least expensive, and producers choose to produce only products that will make profit. The system informs both of these decisions without the producer and consumer having to communicate directly.

In a free system, prices are set naturally by supply and demand in the economy with no outside interference. The higher the demand for a product, the more incentive producers have to make it, but producers are also motivated to keep prices down to attract more consumers. This creates a situation in which both consumers and producers are motivated by price.

In free price systems, competition among producers allows for prices to stabilize themselves. These systems create capitalism, which is distinguished as a market in which individuals are allowed to control all the factors of production, with no government intervention. Profits are unlimited in free systems and are the primary motivation for producers.

In a fixed price system, the market is not left to its own devices; prices instead are controlled by forces outside of the economy. Fixed price systems occur in centrally planned economies where the government is in complete control of all of the factors of production. Supply and demand do not determine prices, rather the government planners decide what to produce, how much to produce and how much to charge. Although the government decides what to produce in this economy, it doesn’t change the needs of consumers, and this can result in scarcity of some items and a surplus of others. These systems are most common in countries that have communist or socialist governments.

Fixed and free price systems are both extremes, one having no regulation and the other completely controlled by the government. Most nations cannot exist with a price system that is purely fixed or purely free. A mixed price system is a combination of these extremes and produces an economy with both government regulation and free enterprise. Most modern economies have a price system that falls somewhere between a free and a fixed price system..